The S&P 500 could plunge 20% within months as a recession ushers in a market correction, BofA says

• Bank of America equity strategists warned that stocks could see a correction in 2023 as a recession looms.
• Historical trends suggest the S&P 500 bottoms out during a recession, rather than before, which suggests more downside ahead.

Aa looming economic downturn could usher in a more dramatic correction in stocks as soon as the first quarter of 2023, even with the S&P 500 already down 15% year-to-date, according to Bank of America.

In a Monday note to clients, the bank's analysts said that the S&P 500 could fall as low as 3,240, or roughly 20%, from it's current mark of about 4,100.

"History suggests that if the US economy experiences a recession, the SPX bottoms out during the recession and not before," the analysts wrote. "Only the March 1945-October 1945 recession saw the SPX rally ahead of and throughout the recession."

The difference between the S&P 500's January peak to its October low represented a roughly 25% drop, but Bank of America warned more downside could loom as the Federal Reserve continues its bid to cool the economy.

"Average and median SPX declines associated with recessions are 32.5% and 27.1%, respectively, and lasted 13.1 and 14.9 months, respectively," analysts said. "This equates to SPX 3,500 to SPX 3,240 in February to April 2023, which aligns with the SPX peak to trough declines associated with the cross of the 12-month MA below the 24-month MA on the SPX."

CME's FedWatch Tool shows that traders are increasingly betting on a half-point interest rate hike at the December 14 FOMC meeting, which would follow four 75-basis-point hikes. Any signs of a so-called Fed pivot is often considered bullish.

But that optimism may be misplaced, the bank said, as 11 of the last 15 rate-hiking cycles have preceded or coincided with downturns.